Says its agreements with e-book publishers are similar, but not identical.

Apple has acknowledged that yes, part of its motivation to launch the iBookstore was to make money, but says its agreements with e-book publishers were a result of individual negotiations. Additionally, the company argues that publishers didn't seem happy with Amazon's pricing tactics and should be able to set their own prices in the iBookstore. Apple's statements come as part of the company's response to a class-action lawsuit brought by (now) 31 US states—largely mirroring the one brought by the US Department of Justice—accusing Apple of conspiring to raise e-book prices.

In its filing this week, Apple says that the iBookstore was partly launched was to generate revenue, but also to "avoid negative margins that it believed Amazon was incurring as it sold certain bestselling eBooks below cost." The company argues that its bilateral contracts with each publisher may have similar terms, but they are "not identical," and the agreements were made on an individual basis—not a joint conspiracy.

And although Apple repeatedly asserts that it has no knowledge of why Amazon originally chose to sell e-books via the wholesale model—as opposed to the iBookstore's agency model, which Amazon eventually switched to in mid-2010—the company does point out that publishers seemed to be unhappy with Amazon.

Agency model

When people refer to the "agency model," it's usually in reference to the sale of electronic content online—in particular, e-books. The "old" way to sell e-books was to use what is known as the wholesale model. Under the wholesale model, book publishers sell a certain number of books to a reseller (such as Amazon or Barnes & Noble) for a set price, then the reseller sets its own price on each book.

"Apple admits that publicly and privately in their individual discussions with Apple, representatives of each of the publishers separately expressed varying degrees of unhappiness with Amazon’s tactics, including its pricing," Apple wrote. "Apple further admits that Amazon is the dominant eBook retailer and wields 'market power' over eBooks."

Apple's response to the class-action suit is less aggressive than its response to the DoJ suit last week. There, Apple called the government's actions "absurd" and "fundamentally flawed," accusing the DoJ of siding "with monopoly, rather than competition." Cupertino appears to feel strongly about its position in these cases, reiterating that it doesn't believe it has done anything wrong and that the agency model is not only perfectly valid, but a time-tested sales strategy.

When it comes to the class-action suit, however, Apple has already suffered some minor setbacks. The company originally tried to get the lawsuit dismissed, only to be smacked down by US District Judge Denise Cote—she denied the request and said there was plenty of evidence that "Apple intentionally and knowingly joined that conspiracy [to raise e-book prices]." Cote also asserted that Apple might not have had the same motivations to join the alleged conspiracy as the publishers it signed agreements with, but Apple could have still been a participant.

In its response, Apple once again argued that the class-action suit should not proceed due to settlement agreements between some of the publishers and various state governments; the company says "it is inequitable to allow both sets of overlapping claims to proceed simultaneously." Something tells us the judge won't throw Apple any bones on that front, so we're likely going see this—and the DoJ suit—go forward.

The fact Apple keeps trying to point out they were breaking Amazon's monopoly only makes me think they were probably doing the wrong thing. Even if Amazon was doing something actually wrong (which they weren't, a monopoly isn't illegal, abuse of monopoly power is) it doesn't mean Apple can break the law.

I'm sure that the publishers hated not being able to fix prices. Thanks to the agency model, even with all of this "competition," e-books cost pretty much the same everywhere. It's amazing how many e-books cost more than a paperback of the same book.

ebooks (as well as physical books) need a method of distribution. The publishers could not have colluded to raise prices in absence of having a willing distribution partner (capable of the volume required) with any success. Whether the allegations of Apple/Jobs being the mastermind behind the whole thing are true, the allegations of collusion tying the publishers with a distribution channel are very strong, if the allegations of collusion are true.

The whinging about supposedly doing it to break a supposed fear of an Amazon monopoly are simply an admission of guilt and an appeal to emotion (FUD) in order to attempt to get leniency and/or to absolve responsibility.

So Apple cares more about making publishers happy than book buyers? Good to know.

Apple keeps trying to imply that Amazon _took over_ e-book market share from B & N, Sony, etc. when actually they grew the market much larger than it had been before. Most of their "monopoly power" (which is legal if not abused, see: Apple's iPad) came from brand new e-book customers.

Selling some books (not all) at a loss was a way to get skeptical paper book buyers to try an e-reader for the first time.

"Apple admits that publicly and privately in their individual discussions with Apple, representatives of each of the publishers separately expressed varying degrees of unhappiness with Amazon’s tactics, including its pricing,"

Separately... they must have communicated with each other before and during the contract negotiations.

Quote:

"The CAC alleges that these contracts were signed within days of each other and prompted an industry-wide switch to the agency model, which constrained price competition among eBooks retailers. The CAC also alleges that Publisher Defendants communicated with each other over the course of the negotiations and Apple acted as a conduit for their messages.

After adoption of the agency model, the price of new bestselling eBooks increased by forty percent on average, even though there had been no corresponding increase in costs. eBook prices are now identical at the four major eBook distributors, Amazon, Sony, Apple, and Barnes & Noble. And, in some instances, the price of an eBook now exceeds the price of a physical book. In addition, although Random House initially refused to adopt the agency model, and had not been allowed to sell its books in Apple’s iBookstore, Random House agreed to begin selling eBooks through the iBookstore under the agency model on March 1, 2011."

It's amazing how many e-books cost more than a paperback of the same book.

Probably it isn't so much the cost of printing and paper as it is the writing, editing, and such.

Well... it depends. According to an actual published author I know, sales of physical books don't really make enough money for an author to live on until they sail on past the 100,000 books sold mark. You have to be a well known (read: trusted to sell a lot of books) author before you can get any significant money from advances. Another thing, the costs for writing and editing are identical whether the final product is an ebook or a physical book. The differences come from artwork (not as much required for an ebook... physical books require the front, back, and spine artwork, ebooks just the front cover), paper, covers, ink, etc. (all physical materials) and logistics of shipping and shelf space. Ebooks take HDD storage, which you can store thousands, if not millions of them in a single cubic foot of space, registering the book in a web store (basically the same for a physical book), and bandwidth for delivery.

The fact Apple keeps trying to point out they were breaking Amazon's monopoly only makes me think they were probably doing the wrong thing. Even if Amazon was doing something actually wrong (which they weren't, a monopoly isn't illegal, abuse of monopoly power is) it doesn't mean Apple can break the law.

I would question if selling below cost to maintain a monopoly is illegal and abuse of monopoly power. Amazon was preventing any competition from entering the market due to predatory pricing.

Apple's argument is that although consumers are now paying more for ebooks, they have a much larger choice of books, stores, and hardware to read them on. That may be a weak argument, but it is still generally true. The question becomes does that increased price outweigh the increased availability, selection and hardware?

I do all my reading now on my 4S, and am tempted to pick up an iPad for the larger screen. But I use the Kindle app because I can use it on almost any device, even though I've almost exclusively used the iPhone for my reading.

I do however check the prices between Amazon and iBooks and often the iBooks price is lower than Amazon's. And so once or twice now I've bought a book through the iBookstore because of this.

So they don't seem to have raised prices for the books I buy (mostly novels and a few tech books).

I would question if selling below cost to maintain a monopoly is illegal and abuse of monopoly power. Amazon was preventing any competition from entering the market due to predatory pricing.

Apple's argument is that although consumers are now paying more for ebooks, they have a much larger choice of books, stores, and hardware to read them on. That may be a weak argument, but it is still generally true. The question becomes does that increased price outweigh the increased availability, selection and hardware?

Amazon isn't the one on trial, though. Apple might argue their actions have improved the industry, but that does nothing to answer the charge that they colluded with publishers. Even having different deals with publishers doesn't preclude them from working together to ensure ebook prices were set at a certain level.

So far, Apple's responses have fallen short of actually denying the charges of collusion that have been leveled against them by the DoJ and that makes them look guilty.

I would question if selling below cost to maintain a monopoly is illegal and abuse of monopoly power. Amazon was preventing any competition from entering the market due to predatory pricing.

Apple's argument is that although consumers are now paying more for ebooks, they have a much larger choice of books, stores, and hardware to read them on. That may be a weak argument, but it is still generally true. The question becomes does that increased price outweigh the increased availability, selection and hardware?

Amazon isn't the one on trial, though. Apple might argue their actions have improved the industry, but that does nothing to answer the charge that they colluded with publishers. Even having different deals with publishers doesn't preclude them from working together to ensure ebook prices were set at a certain level.

So far, Apple's responses have fallen short of actually denying the charges of collusion that have been leveled against them by the DoJ and that makes them look guilty.

Hence that is why I finished my post with the phrase that is for the courts to decide. If Apple can show that consumers were not harmed, then its probably not collusion. If Apple can not show that, it probably is collusion. If Apple can show that collusion was the only way to break the Amazon monopoly which was engaging in predatory pricing, then they may be guilty of collusion, but face a much smaller penalty.

Everyone seems to be harping on Apple for the Agency Model, but that's how they sell all media, everything, not just books. Apps, TV Shows, Movies, all media Apple sells is via the Agency Model, it makes perfect sense for digital distribution since there is no inventory, and it removes all risk from the retailer.

What pricing model should Apple have used then if not the Agency Model? And why would they have any incentive to use any other pricing model?

If Apple can show that collusion was the only way to break the Amazon monopoly which was engaging in predatory pricing, then they may be guilty of collusion, but face a much smaller penalty.

Patently false. That's basically saying vigilante justice should be less penalized. If Amazon was engaged in predatory pricing (which, evidently they weren't as there was a request to look into it filed in 2009 with the evident result of it not being a problem: http://www.nytimes.com/2009/10/23/books/23price.html ) then the proper response would have been to file another request with the DOJ to look into Amazon with respect to predatory pricing. An improper response would be to break the law themselves (if allegations are true).

So, if you think that Apple would have been justified in doing the alleged actions, then you are also a supporter of vigilante justice.

It's amazing how many e-books cost more than a paperback of the same book.

Probably it isn't so much the cost of printing and paper as it is the writing, editing, and such.

No. The primary cost of a paper book is the 50 percent or so that goes to the retailer.

With e-books, the "retailer" is Amazon, and only takes 30 percent. In theory, publishers should have welcomed a shift from paper to e-books because they would make more money.

However, they had other concerns. E-books were priced higher than paper books primarily to protect the HARDCOVER market, where prices are far higher than paperbacks and profits are much greater. Consumers were willing to pay more for hardbacks because of the physical sturdiness of the book, and because the hardcover market consisted of "early adopters" who wanted the latest and greatest before the paperback was available.

E-books change this market completely, because they are released at the same time as hardcovers. It was in the publisher's best interest to price e-books at the same level as hardcovers, but consumers rightfully rejected this idea. The only solution was to collude with each other and Apple to force EVERYONE to sell e-books at the higher price, which turned out to be against the law. Who knew?

Everyone seems to be harping on Apple for the Agency Model, but that's how they sell all media, everything, not just books. Apps, TV Shows, Movies, all media Apple sells is via the Agency Model, it makes perfect sense for digital distribution since there is no inventory, and it removes all risk from the retailer.

What pricing model should Apple have used then if not the Agency Model? And why would they have any incentive to use any other pricing model?

There is no issue with the Agency model. The issue is with alleged collusion.

Hence that is why I finished my post with the phrase that is for the courts to decide. If Apple can show that consumers were not harmed, then its probably not collusion. If Apple can not show that, it probably is collusion. If Apple can show that collusion was the only way to break the Amazon monopoly which was engaging in predatory pricing, then they may be guilty of collusion, but face a much smaller penalty.

The courts will decide this.

And to clarify, Apple would have to show that Amazon was 1) a monopoly, and 2) that they were engaging in predatory pricing:

Wikipedia wrote:

United StatesPredatory pricing practices may result in antitrust claims of monopolization or attempts to monopolize. Businesses with dominant or substantial market shares are more vulnerable to antitrust claims. However, because the antitrust laws are ultimately intended to benefit consumers, and discounting results in at least short-term net benefit to consumers, the U.S. Supreme Court has set high hurdles to antitrust claims based on a predatory pricing theory. The Court requires plaintiffs to show a likelihood that the pricing practices will affect not only rivals but also competition in the market as a whole, in order to establish that there is a substantial probability of success of the attempt to monopolize.[3] If there is a likelihood that market entrants will prevent the predator from recouping its investment through supra competitive pricing, then there is no probability of success and the antitrust claim would fail. In addition, the Court established that for prices to be predatory, they must be below the seller's cost.

Everyone seems to be harping on Apple for the Agency Model, but that's how they sell all media, everything, not just books. Apps, TV Shows, Movies, all media Apple sells is via the Agency Model, it makes perfect sense for digital distribution since there is no inventory, and it removes all risk from the retailer.

What pricing model should Apple have used then if not the Agency Model? And why would they have any incentive to use any other pricing model?

It's not just the agency model, it's the entire combination with the collusion with the book publishers and the agreements to not set the price lower at other stores.

Amazon sold books at a loss to gain market share in both hardware and ebooks. When you are selling an item at a loss you devalue it everywhere.

For instance if Newegg is selling a 480GB SSD for 100 bucks then its hard for anyone else to compete when their fixed costs are say $300 for same item.

It also lowers the value of the item as it should be selling for above $300 bucks.

Simply sell the books what they are worth in the market place.

I see this brought up every time this story comes up, and every time I realize there aren't enough palms for my face.

Loss leaders are a real thing, and completely legal - Look it up. Amazon's ebook business was overall profitable, and the sales/pricing were great for consumers.

Legal or not, the Publishers have a right to not sell the books or change the model, which is what they did.

Of course they did. That is not what they are being sued for. They are being sued for the collusion they engaged in while doing so. That is illegal. Note that Random House is not being sued despite also using the agency model. The difference is that Random House did not enter into a conspiracy with other publishers to switch to that model, they arrived at that change on their own a year later. That is a legal decision to make.

It's not just the agency model, it's also the collusion with the book publishers and the agreements to not set the price lower at other stores.

fitten wrote:

There is no issue with the Agency model. The issue is with alleged collusion.

"alleged collusion" being the key here, no proof, only speculation. Apple denies it, and really what do they gain from such collusion? Access to that vastly profitable eBook business that Amazon has priced into the ground? So much profit that it might add up to a rounding error on their balance sheet?

Come on, All Apple did was require a clause that with the Agency Model they be put on the same plain as all others retails using the Agency Model as well, so that their efforts where not in vain. That they didn't get up and make a big keynote splash about the iBookstore and then have the publishers later screw them by offering lower prices on Amazon or some other seller. Any one would want that same treatment.

Amazon sold books at a loss to gain market share in both hardware and ebooks. When you are selling an item at a loss you devalue it everywhere.

For instance if Newegg is selling a 480GB SSD for 100 bucks then its hard for anyone else to compete when their fixed costs are say $300 for same item.

It also lowers the value of the item as it should be selling for above $300 bucks.

Simply sell the books what they are worth in the market place.

I see this brought up every time this story comes up, and every time I realize there aren't enough palms for my face.

Loss leaders are a real thing, and completely legal - Look it up. Amazon's ebook business was overall profitable, and the sales/pricing were great for consumers.

Legal or not, the Publishers have a right to not sell the books or change the model, which is what they did.

Of course they did. That is not what they are being sued for. They are being sued for the collusion they engaged in while doing so. That is illegal. Note that Random House is not being sued despite also using the agency model. The difference is that Random House did not enter into a conspiracy with other publishers to switch to that model, they arrived at that change on their own a year later. That is a legal decision to make.

Well maybe so, but how is Apple involved? They simply sell the books. Why is Amazon not involved as well given the fact they signed the agreements as well, wouldn't they be liable?

Everyone seems to be harping on Apple for the Agency Model, but that's how they sell all media, everything, not just books. Apps, TV Shows, Movies, all media Apple sells is via the Agency Model, it makes perfect sense for digital distribution since there is no inventory, and it removes all risk from the retailer.

What pricing model should Apple have used then if not the Agency Model? And why would they have any incentive to use any other pricing model?

There is no issue with the Agency model. The issue is with alleged collusion.

this comes up every single time, and every single time i wanna scream at the person who posted it. you are absolutely right fitten, the problem is not with the model, it is with the alleged collusion.

in other words, the fact that in the contracts with apple was a clause that FORBID amazon (or anyone else) to sell a book at a price below what apple was selling it for is the big issue. Also this is probably why barnes and nobles has a little subtext on every single coupon they have that states NOOK devices and NOOK books excluded.

Actually, if you read the case filing, they claim to have emails, phone records, etc. that supposedly support the charges. In fact, one DOJ lawyer commented it that it was one of the most solid cases ever filed by the DOJ.

Quote:

Apple denies it, and really what do they gain from such collusion? Access to that vastly profitable eBook business that Amazon has priced into the ground? So much profit that it might add up to a rounding error on their balance sheet?

No, with raised prices to consumers, Apple would gain a large foothold into the market through smart phones and also expected by the iPad (remember, this was timed to coincide with the release of the iPad). Also, prices would be raised so that Apple would get 30% (Apple's customary portion) of every ebook sale through their store. That would be some serious money since the ebook market was then, and still is, exploding even with the higher prices.

The problem is not with the model, it's with the clause that states books cannot be sold cheaper elsewhere. The law couldn't care less what kind of deal a publisher makes with the retailer, so longs as it doesn't affect deals with other retailers. This clause does so.

Well maybe so, but how is Apple involved? They simply sell the books. Why is Amazon not involved as well given the fact they signed the agreements as well, wouldn't they be liable?

Because it was Apple who made the Most Favored Nation agreement with the publishers, which prevented other retailers from selling the products for less. Then of course there's the comment Steve made before the agency model came into play:

"We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway."

Well maybe so, but how is Apple involved? They simply sell the books. Why is Amazon not involved as well given the fact they signed the agreements as well, wouldn't they be liable?

Because ebooks need a distributor. That's why they believe it was Apple + Publishers. Amazon is not involved because they were forced to sign the agreements because of the alleged cartel. Their choice was to agree or be shut out.

Last weekend, Amazon removed Macmillan books – including Booker prize-winning Wolf Hall by Hilary Mantel – from its US website in protest at the publisher's demand that Amazon stop discounting its titles and start selling them instead at the $12.99 and $14.99 suggested by Apple.

(emphasis mine)

and

Quote:

"We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles," Amazon said, before adding ominously: "We want you to know that ultimately, however, we will have to capitulate and accept Macmillan's terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for ebooks."